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The Reserve Bank of India (RBI) and the Centre on Wednesday pushed for resolution of the contentious issue of the RBI’s economic capital framework and transferring a higher surplus to the latter by setting up an expert committee headed by former Governor Bimal Jalan.

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The Committee on Economic Capital Framework, announced two weeks after Shaktikanta Das took over as the new Governor in place of Urjit Patel, would propose a suitable profits distribution policy taking into account all the likely situations of the RBI, including the situations of holding more provisions than required and the RBI holding less provisions than required. It would also consider treatment of surplus reserves, created out of realised gains, if determined to be held, the central bank said in a statement.

Former RBI Deputy Governor Rakesh Mohan, who is against transferring a higher surplus to the government, is the Vice Chairman of the committee. Economic Affairs Secretary Subhash Chandra Garg will be the nominee of the Finance Ministry while RBI Deputy Governor NS Vishwanathan will represent the central bank. RBI Central Board Members Bharat Doshi and Sudhir Mankad are also members of the Jalan panel. The RBI’s Central Board agreed to set up the panel in its meeting in November.

The Jalan panel would review the status, need and justification of various provisions, reserves and buffers presently provided for by the RBI and review global best practices followed by the central banks in making assessment and provisions for risks which central bank balance sheets are subject to, the RBI said in a statement.

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One of the contentious issues in the conflict between the government and the RBI was the size of the central bank’s reserves which at Rs.9.6 lakh crore was reckoned as excessive by the government. Of the RBI’s total reserves of Rs 9.6 lakh crore, the currency and gold revaluation reserves alone account for Rs 6.9 lakh crore. The other components of the reserves include the contigency fund of Rs 2.31 lakh crore, the asset development fund of Rs 22,811 crore, the investment revaluation account of Rs 13,285 crore and foreign exchange forward contracts valuation account at Rs 3,282 crore.

According to analysts, the panel will have to address the question of excess ‘reserves’ which is subjective with varying opinions on optimal levels of ‘reserves’, and the degree of conservatism of the central bank. While the RBI necessarily needs to be conservative, another argument is that a central bank can always print money to provide support in an adverse situation and hence does not require excess ‘reserves’.

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In the Economic Survey 2016-17, former Chief Economic Adviser Arvind Subramanian had said that the RBI “is already exceptionally highly capitalised” and its capital transfer to the government can be used for recapitalising the banks and/ or recapitalising a public sector asset rehabilitation agency.

However, this proposal was opposed by the then RBI Governor Raghuram Rajan.

Rakesh Mohan has been vocal in his views against the transferring of surplus to the government. “The use of such a transfer would erode whatever confidence that exists in the government’s intention to practice fiscal prudence,” Mohan said in a recent article.

“Raiding the RBI’s capital creates no new government revenue on a net basis over time, and only provides an illusion of free money in the short term,” he said, opposing transfer of surplus money to the government. In his speech on October 26, RBI Deputy Governor Viral Acharya had listed the Argentina crisis to argue against transferring surplus to the government. “This involved the transfer of $6.6 billion of the (Argentina central bank reserves to the national treasury. The claim was that the central bank had $18 billion in “excess reserves.” In fact, Redrado had refused to transfer the funds; so the government attempted to fire him, by another emergency decree on January 7, 2010 for misconduct and dereliction of duty; this attempt, however, failed, as it was unconstitutional.”

“Besides sparking off one of the worst constitutional crises in Argentina since its economic meltdown in 2001, the chain of events led to a grave reassessment of its sovereign risk,” Acharya said.

In August 2018, the RBI offered to pay a dividend of Rs 50,000 crore to the government for the previous fiscal. However, facing fiscal pressures, the government was not happy with this surplus.

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The Jalan Committee will submit its report within a period of 90 days from the date of its first meeting. It would suggest an adequate level of risk provisioning that the RBI needs to maintain and determine whether the RBI is holding provisions, reserves and buffers in surplus or deficit of the required level of such provisions, reserves and buffers, the central bank said.